Property investors remain unfazed by political and economic turbulence

German investment market stays on track in first six months of 2019

July 04, 2019

FRANKFURT, 4th July 2019 – Despite all the negative reports, the German investment market continued to perform well in the second quarter of the year. Indeed, it might seem that property investments never fall on hard times. Is it the inherent strength of the products or the weakness of alternative investments that impels investors to expand their portfolios through purchases of commercial or residential properties in Germany?

“The motivating force is and remains risk-free interest rates at close to zero, which even in the case of rising prices provides at least an adequate return. And rents in German offices and housing still seem to fuel such high expectations that economic and political risks appear to take a back seat. The insurance sector serves as a good example of this trend. The sector has not only expanded its real estate quota in recent years but also intends to increase it further in the near future. This is also likely to involve riskier investments outside the core property segment,” said Timo Tschammler, CEO of JLL Germany.

Tschammler added: “However, investors would be well advised to make themselves aware of the current risk factors and reassess their investment strategy in relation to the different asset classes. For example, foreign investors are currently considering whether an investment in residential property in Berlin is still an attractive proposition given the ongoing debate about rental caps, brakes on rent and expropriation. The much-lauded ‘safe haven’ of Germany is starting to crumble in light of these inconsistences.”

He continued: “Added to that are the current concerns at global and European level, which have not diminished in the past three months. On the contrary: in addition to Brexit, Italy’s public debt and the escalating international trade wars, there has been an ominous rise in tension between the USA and Iran in recent weeks. Taken altogether, this does not provide a good basis for a stable and investor-friendly environment. In the USA, the Federal Reserve is already sending out first signals of a cut in interest rates, and the ECB is wondering which monetary policy “arrows” it can still pluck from its quiver if the economic climate continues to deteriorate. The dark clouds are still only on the horizon, and have not yet had any real impact on the investment market because the continuing robust performance of the lettings market, as well as opportunities driven by low interest rates, have too great an effect.”

Transaction volume* remains at a similar level to last year

JLL advises seller in Germany’s largest single-asset transaction to date

After a somewhat muted start to the year (Q1 including Living: €15.2bn), the investment market again showed its more resilient side during the second quarter (including Living: €17bn). “Despite the persistent imbalance between supply and demand, neither a shortage of products nor rising prices seem to act as a deterrent to investors,” said Tschammler.

Including the asset class Living, the total transaction volume between January and the end of June 2019 stood at approx. €32.2 billion, which is 12% lower than in the same period of 2018. This was despite the fact that the number of completed transactions in the second quarter fell by almost 30% compared to the first three months of 2019. Excluding residential property, the half-year result amounted to €23.4 billion. “This indicates that large-volume transactions had a mitigating effect on the result. Seven of the ten largest transactions in the first half of the year were completed in the second quarter,” said Helge Scheunemann, Head of Research at JLL Germany.

The sale of a residential and commercial building portfolio by Chinese investment fund CIC to a consortium comprising ZBI Group and Union Investment, as well as the sale of 57 department stores by Hudson’s Bay Company to the Austrian Signa Group, not only represented the top two transactions, but each deal also exceeded the €1 billion mark by some margin. The largest single-asset transaction took place just before the end of the quarter, and involved the sale of Frankfurter Welle for about €620 million. JLL was awarded the mandate for this transaction by the seller. Overall, single-asset transactions accounted for more than two thirds of the total volume. Portfolio deals gained some ground in the second quarter, with a volume of almost €10.5 billion by the end of the first half. However, this was still 28% below the previous year’s result.

“Thus deals for some of the larger buildings and portfolios that had been involved in sales proceedings since the end of 2018 were realised in the first half of the year. On this basis, and bearing in mind that we expect investor demand to remain at a high level, we are maintaining our forecast that the transaction volume will be in the range of €70 billion in 2019 as a whole,” said Tschammler.

Berlin accounts for almost 40% of the Big 7 transaction volume – number of traded office properties declines

In tandem with the positive development of the investment market in the second quarter, the transaction volume in the Big 7 also increased again. Including Living, more than €17 billion was invested in these markets in the first half of the year (excluding Living: almost €14 billion). The rate of decline compared to the same period of the previous year decreased from 23% (Q1 2019/Q1 2018) to 14% (H1 2019/H1 2018). Foreign investors slightly increased their share of the volume in the second quarter and accounted for 34% in the first six months. Domestic investors were responsible for five of the ten largest purchases and retained a significant role.

Market performance was extremely variable depending on the city. While Berlin accounted for six of the ten largest transactions in the Big 7, corresponding to a total transaction volume of more than €6.7 billion and a 36% increase year-on-year, the decline in volume was most pronounced in Hamburg (-49%) and Munich (-44%). “However, we still have to repeat the same clarification quarter after quarter: the weaker performance in Hamburg and Munich is by no means owing to a decline in demand. On the contrary, in structured bidding processes there is still fierce competition between investors for the best investment products. In view of the growing pipeline for new office construction projects for this and next year, new and attractive investment opportunities should re‑emerge in the office asset class in these two cities,” said Scheunemann.

Transactions in Erlangen, Nuremberg and Wiesbaden with individual volumes of between €230 and €320 million ensured that large deals also took place in individual markets from the so-called “second tier”. In total (single-asset and portfolio transactions), around €15 billion was invested outside the established seven strongholds in the first half of the year, which was 10% below the year-ago level. Almost 40% of all single-asset transactions took place in cities outside the Big 7.

The second quarter also did not bring about any significant change in the distribution of relative shares among the different asset classes. The focus of investors remained clearly on office property, which accounted for a share of 36%. With 27 transactions over €100 million apiece, this asset class also accounted for the biggest share of large-volume deals. However, 70 office transactions were registered in the second quarter (single-asset and portfolio transactions) and represented the lowest value of the last five quarters. “In our view, this does not constitute a fundamental turnaround. Rather, we are seeing that investors are attempting to diversify their portfolios,” said Tschammler. This also then explains the shares of the other asset classes. In second place is Living with 28% followed by retail property with a share of around 15%. The latter made up some ground, not least because of the Karstadt-Kaufhof transaction that was valued in the billions. "However, it should be noted here that specialist retailers and retail parks have retained their role as investor darlings. Despite the size of the Karstadt-Kaufhof department store portfolio, specialist retail products account for 40% of the volume invested in retail property,” said Scheunemann.

Office yields are unchanged - but remain under pressure

Prime yields for top office properties took a much-needed breather in the second quarter. The average office prime yield for all seven strongholds was unchanged at 3.06% compared to the previous quarter, although it was 12 basis points lower on an annual basis. However, yields will remain under pressure because of the combined effects of investor demand, the development of government bonds as “risk-free” alternative investments and expected further increases in rents. “By the end of the year, we expect to see a slight decline in the Big 7 by 10 basis points to 2.96%,” said Scheunemann.

During the second quarter, yields were also unchanged in areas of the Big 7 that lie outside the top locations, or for properties of a lower standard of quality. The yield for top properties in secondary locations was 3.41%, which is 35 basis points higher than the prime yield and compared to a property in a prime location. In the case of vacancies or shorter remaining leases, the yield currently stands at 3.89%.

Although yields were stable in the second quarter, the JLL capital value index for prime properties increased further by the end of June and was 13.8% higher compared to 12 months previously. “This again shows the importance of the upward trend in rental prices, which, with a share of 7.8% in the index, now has a greater significance than yield compression,” said Scheunemann.

In contrast to the prime yield for office real estate, top prices for logistics property increased further in the second quarter. At 3.90% (-10 basis points compared to Q1 2019), the prime yield moved below the 4% threshold for the first time. “In our view, the bottom has not yet been reached. By the end of the year, we expect to see a further decline to 3.75%. The increasingly close ties between retail and logistics properties are blazing a trail for yields such as these. In a multi-channel world driven by online shopping, new logistics properties that are located closer to cities are playing an increasingly important role in the complex supply chain between retailers, logistics providers and end‑users,” said Scheunemann.

In the case of retail property, the differentiation between the individual segments that has been evident since the end of 2018 has continued. While yields for shopping centres increased by a further ten basis points to 4.20%, the prime yield for specialist retail products fell ten basis points to 4.30% in the second quarter owing to continuing strong demand and is approaching shopping centre returns. Prime yields for individual specialist stores as well as central commercial buildings remained unchanged at 5.10% and 2.87% respectively. For both types of use, no change is expected before the end of the year.


 *The transaction volume encompasses  office, retail, logistics and industrial property, hotels, land, special property, mixed-used property and the Living asset class with multi-family buildings and residential portfolios including at least 10 residential units and with a residential use of over 75%, the sale of company shares with the acquisition of a controlling majority (without a stock market listing), apartment blocks, student housing, retirement/care homes and clinics.


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